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Earlier this year, China took a major step in combating climate change by launching a pilot CO2 emissions trading system within some of its provinces. This is the first step in a series of planned reforms and part of a larger effort to reduce CO2 intensity by 17% in 2015, relative to 2010 levels.

In a study appearing this week in the November issue of Energy Economics, a group of researchers from MIT and Tsinghua University test the efficiency and equity of the provincial approach by comparing it to a national carbon-trading program. They find that while China can achieve its reduction goal with either a provincial or national level trading system, the national system encourages reductions where they cost the least—resulting in less welfare loss.

“Leaders in China want environmental protection measures to be fair to all regions and households. They also want to choose policies that will be the most cost effective,” says Da Zhang, the lead author of the study and a PhD student with Tsinghua University. “We hope that our research will help policymakers understand the distribution of the burden of alternative policy options, and help them to determine the most cost effective method of reducing CO2.”

Zhang and his coauthors are part of the Tsinghua-MIT China Energy and Climate Project, a collaborative effort between the MIT Joint Program on the Science and Policy of Global Change and the Institute for Energy, Environment and Economy at Tsinghua University in Beijing, China.

The international team finds that imposing CO2 targets at the provincial level results in a consumption loss that is about 20 percent greater than if targets are achieved through a national system. Zhang explains that this is because in a provincial level system, industries may miss out on low-cost opportunities in other provinces and be forced to invest in more expensive abatement measures.

“In contrast, a national target creates incentives to make reductions where they are the cheapest,” says Zhang. “Though we realize there are challenges in implementing a national system, especially when provincial governments are currently accountable for CO2 reductions in their communities.”

To investigate the impacts of this policy, the researchers built a model they call the China Regional Energy Model, or C-REM. The C-REM disaggregates China’s 30 provinces and details the entire energy system. The model also includes global trade data to measure the interactions between China and the global economy.

“This work and the model our team developed are the first steps in our analysis of a broad range of energy and climate policy proposals in China,” says Valerie Karplus, co-author of the study and the director of the Tsinghua-MIT China Energy and Climate Project. “The analysis we produced reflects intensive exchange and learning within our integrated research team.”

She notes future analysis will also include comparing different designs of emissions trading programs and measuring the additional or unintended impacts of air pollution polices.